Philippine Bonds Slump as Tetangco Signals Rates Could Be Raised

Philippine bonds fell the most in 10 weeks and the peso dropped as comments by the head of the central bank spurred speculation borrowing costs could be raised as early as next week.

Bangko Sentral ng Pilipinas favors “early, measured adjustments in monetary policy,” as gradual movements are less disruptive and will help businesses plan better, Governor Amando Tetangco said in a mobile-phone message today before a March 27 rate-setting meeting. Federal Reserve Chair Janet Yellen said the U.S. central bank’s stimulus program may end in the second half of this year and benchmark interest rates could be increased around six months later.

The yield on the 1.625 percent bonds due April 2016 surged 30 basis points, or 0.3 percentage point, to 2.5 percent as of 4.58 p.m. in Manila, according to Tradition Financial Services. The yield climbed the most since Jan. 7 to a five-week high

Tetangco’s comments “make me revisit my tightening scenario and advance it to as early as next week,” said Joey Cuyegkeng, ING Groep NV’s Manila-based economist. “A tightening of liquidity is possible, as a signal for the normalization of BSP’s monetary policy.”

Money-supply growth has exceeded 30 percent every month since July and reached a record 38.6 percent in January. BSP has kept its overnight borrowing rate unchanged at a record low 3.5 percent since October 2012.

The peso fell 0.6 percent to 45.11 per dollar at the close, its weakest level since Feb. 11, according to Tullett Prebon Plc. Today’s drop was the biggest in four months. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose one basis point to 5.7 percent.

Geopolitical Risks

Consumer prices rose 4.1 percent in February from a year earlier, compared with a two-year high of 4.2 percent in January, the government reported on March 5.

“Even as domestic inflation over the policy horizon remains within target, measured adjustments may be warranted given external developments including the heightened geopolitical risks that could result in volatility in international commodity prices,” Tetangco said today.

Yesterday, he said global interest rates are on the rise and preemptive action would mean gradual adjustments that are less disruptive.

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